Required Minimum Distributions Explained

Required Minimum Distributions Explained

As a retirement plan participant, you are subject to certain rules and regulations determined by the Internal Revenue Service (IRS). You may be familiar with retirement rules regarding maximum contributions or early withdrawal fees, but another important rule includes required minimum distributions – or RMDs.

RMDs require participants of tax-deferred retirement accounts to make withdrawals – and pay taxes on the withdrawals – every year, starting at age 73. Eligible accounts noted by the IRS include IRAs, 401(k), 403(b), 457(b), and profit-sharing plans. A full list can be found on the IRS website.

While there are caveats to some RMDs and retirement plans, it’s important to understand the general outline of how RMDs work and how you can plan ahead to use them. Read below to learn more.

Calculating RMDs

Understanding RMDs as they pertain to your account is crucial, and not a one-size-fits-all formula. Investopedia notes that RMDs are determined by the fair market value of a retirement account to the participant’s life expectancy. This means that participants may be subject to different withdrawal requirements based on their account totals, age, employment status, deferral qualifications, and more. Luckily, the IRS provides worksheets for participants or plan owners to use as a guide to determine RMDs. Find the worksheets here.

In addition to worksheets, you can also use online calculators to determine what your required minimum distribution will be each year. The Slavic401k RMD calculator has been updated for the SECURE Act 2.0 of 2022 and the CARES Act of 2020, which adjusted the rules for RMDs and the age participants had to begin withdrawals. The calculator considers the year of the RMD, the estimated rate of return, the account balance, and the participant’s birthday to determine the projected life expectancy and the RMD for each year.

Using RMDs

When the time comes to start withdrawing funds and utilizing RMDs for your retirement plan, there are some spending rules to understand ahead of time.

When RMDs begin and you start withdrawing funds from your account, those funds are seen as taxable income and you will need to report it to the IRS with your tax filings each year. Because of this, you will owe the money on the withdrawals which can add up to thousands you may not have accounted for previously. That’s why it’s important to stick to the distribution schedule and avoid withdrawing more than you need because you’ll be taxed for a higher income level. By using RMD calculators, you can plan ahead and put money aside to pay the taxes you’ll owe.

In addition, there are other rules associated, such as not being able to use the funds to invest in another retirement account. Charles Schwab provides some alternative ideas, including using the funds for everyday expenses, giving monetary gifts, opening a brokerage account, contributing to a 529 savings plan, or adding the funds to a traditional or Roth IRA. While the options are seemingly endless, it’s important to work with a financial advisor or plan manager to understand the rules and regulations associated with your account, helping you make solid financial decisions for your retirement.

If you would like to learn more about retirement solutions, visit the Slavic401k blog to learn how to make, save, and spend your money for the future.

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